Collaborate to Innovate: a new venture capital model

COLLABORAZIONE, INNOVAZIONE, RICERCA
E IMPRENDITORIALITA':
DUE REALTA' A CONFRONTO

Alberto Sangiovanni-Vincentelli
The Edgar L. and Harold H. Buttner Chair of EECS
University of California at Berkeley
Co-Founder, CTA and Member of the Board
Cadence Design Systems
Comitato Esecutivo, Istituto Italiano di Tecnologia
Comitato Scientifico, CNR
Advisory Board (Walden International, Sofinnova, Innogest,
Xseed (MDV))
Investment Committee (Fondo Atlante, Fondo Next)
Copyright: Alberto Sangiovanni Vincentelli 2010

OUTLINE

• Research, Innovation and Venture Capital in Silicon Valley
• Technological Opportunities driven by Collaboration and Research
• Research, Innovation and Venture Capital in Italy (and Europe)
• A New Venture Capital Model for Italy?


Collaborate to Innovate

• Firms will focus more sharply on what they do best, and they will enlist a
growing diversity of suppliers for the rest. Organizations will increasingly
look outside their walls not just to reduce costs but for innovation – in
processes, product and service differentiation – to free up resources,
transform their businesses, and facilitate sustainable competitive
advantage. As supply networks become more global and complex,
winning will depend on transparency, trustworthiness, and reciprocity. In
a word: collaboration. (Alan McCormack et al. (HBS))
• The ideal collaboration model is the Virtual Corporation where the
different firms involved in collaboration act as if they were division of the
same corporation (or even better!!).

Silicon Valley: The land of Innovation


Factors in Success

Infrastructure
– Legal and financial services
– Excellent Universities
– The simultaneous presence of large, medium and small companies
– The “network”: both inside and outside company boundaries

6 Copyright: Alberto Sangiovanni Vincentelli 2010

US Capital Market Segmentation

• Private vs. Public capital markets
• Private Equity:
– Founders, family, friends and fools
– Angels, organized angels and seed stage funds
– Early stage venture funds – “A round” investors
– “B-Nth” Round venture funds
– Late stage Private Equity
– Mezzanine and Cross-over funds
– Buy-Out Funds


Attributes of Start-Up Enterprise

• Discrete and defendable market niche
• A differentiated technology that has a sustainable competitive advantage
• Core competencies
– Market specification & Solution Architecture
– Product Specification & Technical Architecture
– Product Development
• Adaptable executive team
• An investment group that brings marketing and operational expertise


The role of VCs in the Industrial Innovation Landscape
• As a complementary lens on technological and market change
– VCs see the world differently
• As a window on global technology development
– Technology is global and driven by local/regional needs
• As a supplement to or portfolio hedge against internal R&D programs
– Not even the best and biggest corporate R&D can cover all possibilities
• To drive new/expanded market development or other strategic (non-R&D)
objectives (Intel; Microsoft)
• Explicitly to develop risky new ideas that will initially flourish better outside the
corporation (Cisco)
– A form of outsourcing of innovation
• The best VCs adhere to "simple" fundamentals:
– world-class leadership and team;
– large, growing market;
– defensible big idea;
– rigorous application of best innovation practices Copyright: Alberto Sangiovanni Vincentelli 2010

Speaking VC: Structure of a Venture Capital Fund

• General Partner: Manages each fund
– Typically 2–4 funds simultaneously at different stages of their life-cycles
• Limited Partners: Supply the capital
– A 10 year commitment per fund
• The purpose: Investment, liquidity (exit), returns
• Incentive structure
– Management fee: 2–3% of committed capital
– The Carry: 20:80 split of investment gains
• The inherent contradiction: Fund size vs. LP returns
– 10 year performance cycles vs. 2–3 year capital-raising cycles

Source: M. Borrus, Xseed

Risk Factors in Evaluating Startup Opportunities

• Execution Risk
• Market Risk
• Technology Risk
• Variable Factors (dependent on sector or specific opportunity):
– Future Financing Risk
– Regulatory Risk


Liquidity and Returns

• Exit options
– IPO vs. M&A (see chart, next slide)
– Bankruptcy vs Shut-down
• Typical venture portfolio performance:
– Historical data:
– Out of every 10 investments
• Half do not return capital
• 1 returns >10X
• Rest return 1-10X


U.S. Venture Capital Investment
1995–2008

$120,000
105,140

$100,000
$ Million Invested

$80,000

$60,000 54,102

40,609
$40,000
29,406 28,298
26,449
21,100 21,941 19,730 22,422 22,968
14,894
$20,000 11,271
8,031

$0
1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008
Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report; Data: Thomson
Financial Copyright: Alberto Sangiovanni Vincentelli 2010

Venture Exits—IPOs and M&A
by Year, 1991–2008

600

M&A
500
IPO
Number of Issues

400

300

200

100

0
91 92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05 '06 '07 '08
M &A 17 76 74 100 97 116 164 209 240 317 353 318 290 339 350 368 355 260
IPO 156 181 220 166 202 270 136 77 260 264 41 22 29 93 57 57 86 6

Year

Source: NVCA, Thomson Reuters Copyright: Alberto Sangiovanni Vincentelli 2010

Venture Investments by Round, 1994-2004
Investment Allocation by Round Class (Annual)

*Seed and First Rounds Combined Source: VentureOne/Ernst &Young; DowJones/VentureSource

What Drives Venture Returns?

• Market growth not absolute size
• Efficiency of capital deployment
• Irrational exuberance in exit markets
• A handful of big winners

And most of all

• Fundamental Innovation—The (Tech) world isn’t “flat” (next
slide)

The (Tech) World Isn’t Flat:
Boston
Distribution of most referenced patents (Medical, HiTech
Harvard, MIT)
Michigan Illinois
(GM, Ford, Chrysler, (Motorola,
U. Michigan) U. Illinois)
Oregon, Washington
(Microsoft, Intel
U. Wash, Toronto)

Silicon Valley
Texas
(Houston, TI, Freescale
LA, S. Diego U. Texas)
(Qualcomm, Defense
UCLA, UCSD) Copyright: Alberto Sangiovanni Vincentelli 2010
Source: ATP and George Mason University

Consequence: VC Investment by US Region (2008 vs. 2007)
California (Especially Silicon Valley) Rules!
# of $ in Millions—All Results Rounded
Deeds

0 3,000 6,000 9,000 12,000 15,000
1,552 $14,264
California 1,624 $14,735

405 $2,974
Massachusetts 446 $3,714

295 $1,203
New York 199 $1,130

146 $1,299
Texas 172 $1,469

164 $955
Washington 175 $1,382

100 $813
Colorado 97 $610
90 $708
New Jersey 92 $632

171 $603
Pennsylvania 159 $819
2008
47 $491 2007
Minnesota 57 $489

81 $499
Virginia 94 $557

0 5,000 10,000 15,000 20,000 30,000
2,091 $23,069
Top 10 Total 3,110 $25,595

Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report; 2008

Factors in Success 1

People and Technology:

• Scientific and Technology education
• Centers of excellence in research
• Talent pools (people form Universities and companies interested in high-
risk high-reward activities)
• Ability to attract the “best” to the region (infrastructure for families and
continuous learning) but attention to moving social and financial costs


Pasteur’s Quadrant
Considerations of Use?
NO YES

Pure Basic Use-Inspired
YES Research Basic Research
(Bohr) (Pasteur)
Quest for
Fundamental
Understanding?
Pure Applied
NO Research
(Edison)

D. Stokes Copyright: Alberto Sangiovanni Vincentelli 2010

University-Industry Relationships

• Professors are promoted on the basis of their contributions in all areas,
including professional activities
• Reciprocal respect and attention to respective roles
• Unrestricted grants: “speed not patents”
• Transfer of technology through visiting professionals and summer
students
• Formation of new companies favored


Factors in Success 2

Financial

– Stock market structure for public offering of new companies
– Venture Capital
– Investment banking (Underwriters)
– Stock market regulations
– Institutional investors with high-growth interest


Factors in Success 4:
The Valley “Culture”

• Move fast
• Leverage all you can
• Do not be afraid of making mistakes
• Learn from your errors
• If you fail, try again
• Re-invent yourself and your company constantly
• Grow grow grow ……


Innovation as a Long-term System
Innovation Cycle

Reinvestment

Advocates
Customer
Product Production E-service &
Basic Applied Marketing
& Process application
Research Research Distribution &
Development providers
Infrastructure

Government, Universities Large Companies Private & Venture Small & Large
& Private Institutions Capital Public Markets Market-focused
Developers

Investment

Source: Regis McKenna; McKenna, Borrus and Cohen

X/Seed Capital

• Founded late 2006
• Seed-focused, ‘very’ early stage venture capital
– High risk—high reward
– Emphasis on systematic risk-reduction and company-building
– Reflects significant changes in US capital market for innovation
• Diversified portfolio:
– To date: 45% Energy/CleanTech, 35% Life Sciences,
20% IT/Internet
• Geographically concentrated in Western US
• Focused on breakthrough innovation


Case Studies

• The Cadence and Synopsys story


Cadence

• Founded in 1983 by UC Berkeley professors (ASV and Newton), and one National
Semiconductors High-Level manager
• Innovation in technology and funding model (large enterprises (4M$) and VC (1M$))
• Almost out of business in 1986, refinanced with largest help by a large enterprise
• To go IPO in 1987 (Black Monday)… Public by reverse merger
• One Of The Ten Largest Software Companies in the World and one of the largest
companies in the world (Forbes 500, Fortune 1000)
– $916 million revenues in 1997, 1.6Billion in 2008
– 5,200 people worldwide
– More than $ 5Billion Market Capitalization 2007 (now 1.9B$)
• One of The two Leaders in Electronic Design Automation (EDA)
– Software used to design electronics


Cadence’s Missed Opportunity: Synopsys

• Synopsys founded in 1987 by team from GE and UC Berkeley (2
professors (ASV and Newton), 2 ASV students)
• Replicated funding model of Cadence
• IPO in March 1991 (only one quarter non profitable form inception)
• Today largest company in industry with 5,500 employees and market
capitalization of more than $3Billion!

In both cases we leveraged strong customers’ interest in the technology!


The Promise: Towards Integrated Wireless Implanted
Interfaces
Moving the state-of-the-art
in wireless sensing clock

regulator memory

Tx DSP

LNA ADC

electrodes

Power budget: mWs
[Illustration art: Subbu Venkatraman] to 1 mW

The Promise: Brain-Machine Interfaces
The Application of Neuroscience
Examples
• Cochlear implants, Deep-brain stimulation for Parkinson’s disease
• Spinal cord injuries/amputees (upper-limb prosthesis)
– Estimated population 200,000 people in the US
– 11,000 new cases in the US every year

[ Nicolelis, Nature, 2001]

[Lebedev, SA, 2006]

[Sources: National Institutes of Health, Neurology journal]

Engineering Tomorrow’s Designs:
Neurons drive Electro-Mechanical Systems
Italian Institute of Technology Genova Central Research Center
The Neuroscience Brain Technology Department – Fabio Benfenati’s Group

Generate spatially-ordered 2d and 3d neuronal (NON NEURAL) networks


THE HIGH-RESOLUTION
NEURON-TO-CHIP INTERFACE
Luca Berdondini

random addressing logic

column amplifiers

active area
20 μm
64x64 pixels
625 el./mm2
5.5 mm

200 μm

16 output amplifiers

5.3 mm
▪ technology: 0.35 μm CMOS (4 metal-layer process by AMS)
• 625 electrodes per mm2
• inter-electrode separation of 20 µm Copyright: Alberto Sangiovanni Vincentelli 2010

THE 4096 ELECTRODE SPATIAL RESOLUTION


NEURO-ROBOTIC INTERFACES:
from neuronal networks to an external body (Sergio Martinoia)

SENSORY
STIMULATION
(experience)

NEURAL MOTOR
COMPUTATION COMMANDS
(adaptation, plasticity, (purposeful
emerging properties) behavior)

Obstacle avoidance task
10 min per phase

Phase 1
Free running

Phase 2
Learning

Phase 3,4
Avoidance

Phase 5
Free running

Engineering Tomorrow’s Designs
Synthetic Biology

The creation of novel biological functions and tools by modifying
or integrating well-characterized biological components into
higher-order systems using mathematical modeling to direct
the construction towards the desired end product.
“Building life from the ground up” (Jay Keasling, UCB)
Keynote presentation, World Congress on Industrial Biotechnology and Bioprocessing,
March 2007.

Development of foundational technologies:
Tools for hiding information and managing complexity
Core components that can be used in combination reliably
37

Pioneering Synthetic Biology

Moving from ad-hoc to structured design
[Reference: Scientific American, June 2006]

Italy Innovation 40-60% below comparable nations

EU 27 “European Innovation Scoreboard”

0,50 0,55

0,35

Source: European Community:“European Innovation Scoreboard 2008”

40

R&D Gap is in the Private Sector

R&D as% of GNL

Private Companies State and P.A.

Svezia
Giappone
Stati Uniti
)
Germania
Francia
Canada
UK
Italia

0 1 2 3 4

Fonte: Intesa Sanpaolo, Servizio Innovazione della Divisione Corporate su dati OECD 2005 - The Economist - August 2007

41

47% of research and innovation is in University and Research Centers

University
77 Universities
59.344 employees in 2005 (18.781 full profs, 18.525 associate (22038 assistan)
Res. Expenses= 5,098 Millions euro (2006) – 30,3 % of total expense for R&D
R&D Expenditures

Public Research Centers
Large:: CNR, ENEA, ASI, INFN, ISS, ISPESL
Small: 10 managed by MUR 30,30%
32 Research Centers of Health Ministry
23 agriculture experimentalcenters of the Agriculture Ministry
30,000 researchers
Research expense = 2,897 millions euro (2006) 17,2% of total expenses.

Nonprofit
Research expenses = 630 Millions euro (2006) 3,7% of total. 17,20%
3,70%
Industrial University Public.
• 70,200 researchers
• Research expenses = 8,210 millions euro (2006) 48,8% of total.
Priv. No Profit Enterprisee

Total R&D = 16,835 milions euro (2006)
7,995 Public (Univ.* Publ.) 47,5% del tot.
Source: ISTAT – Nov 2008

Fonte: Intesa Sanpaolo, Servizio Innovazione Divisione Corporate su dati ISTAT 2008 Copyright: Alberto Sangiovanni Vincentelli 2010
42

Some positive signs
First Quartile EU-27 for
Numero 1 in Europe non R&D innovation
+50% new patents
for etrepreneurship
Human Resources (2003 vs. 1998)

621 new
enterrprises 400
born in million€
Universities University of new
Capital
venture
50% of all capital
University Infrastructure 2007-
driven 2008
enterprises of 14 public actors to sustain technology innovation in 2008
the last three
years

Latent Innovation that should be explored and exploited

Fonte: Eurostat 2007, Netval, Servizio Innovazione Divisione Corporate Intesa Sanpaolo, Elaborazioni Atlante Ventures

43

Some Excellence by Sector
Example of High-Tech Sector

Nanotecnology Biotecnology Medical Devices
 169 active entities  228 firms  70 companies dealing with
 Total revenues > 4.8 bln biomedicales for a total
 70% located in Center and
estimated revenue of 500 mln
North  11% year to year growth
euro
 4,300 researchers  1,3 billion euro invested in R&D
 Export >60% of revenues
 14,000 researchers
 314 patents in 2004-2007 (1)
 77 drugs in experimental trial
 599 biotech generated drugs under
trial in 2001-2007(2)

Even if large number of small players can be a systemic weakness

(1) Fonte: AIRI Nanotech, II Censimento Italiano delle nanotecnologie, (2007)
(2) Fonte: Blossom & Associati, Assobiotec, Farminustria, Rapporto Biotech 2008
IPI, il settore della biotecnologia in Italia, 2007. Lo studio indica in 300 le aziende presenti in Italia, includendo anche le filiali italiane di multionazionali
(3) Fonte: Consobiomed
44

Italy is below the average in available capital

Italia ranking in EU 27 -2008

Innovation corporate
Venture Capital Credit R&D corporate R&D
NON- R&D

Capital investments

• Typically at the beginning
• High Tech
• Very large opportunities

Fonte: Elaborazione Intesa Sanpaolo su dati EIS 2008– Pro Inno Europe Copyright: Alberto Sangiovanni Vincentelli 2010
45

Effects on industrial sector

High Tech companies in the first 15 public companies: USA and Italia

•Microsoft 13% •Telecom Italia
•AT& T
2 •FInmeccanica
9 60%
•IBM
•Google
•G.E.
•Cisco
•Pfizer
•Verizon
•Intel

USA Italy

Fonte. Elaborazioni Atlante Ventures su dati Financial Times e dati di borsa al 13 marzo 2009

46

Competitive Landscape

Angel Early Stage Late Mature
Seed – 1° round Enterprises–
Investing Stage -
e follow on pre-IPO, LBO
Expansion
round

Interesting Recent New
Intitiatives
Italian Not always possible to position
Funds them

Club degli Investitori Quantica Innogest

•Many players
Main Attivi in
Italia •Specialized
European
Funds

47

VC in Europe gives low return of interest

European Venture 3-,5-,10-Year Rolling IRRs (*)

30 10-year IRR

5-year IRR
25
3-year IRR
20
Rolling IRRs (%)

15

10

5 +4.4
+1.8
0 +0.9

-5
1

2

3

4

5

6

7

8

9

0

1

2

3

4

5

6

7
99

99

99

99

99

99

99

99

99

00

00

00

00

00

00

00

00
1

1

1

1

1

1

1

1

1

2

2

2

2

2

2

2

2
-10

-15

Source: Thomson Financial on behalf of EVCA

(*) Performance computed on the basis of the value of Net Assett Value at the begiinning, cash flow during the period and of the estimated Net Assett Value at the end
of the period excluding management fees and carried interest.

48

Past Experience

– Insufficient selection process not based on industrial sector analysis
– Too much emphasis on product/technology and too little on innovation development process
– High valuations wrt risks
– No or little dialog among start-ups, established companies and institutions
– Little synergy public-private sector
– Not enough leverage of scientific know-how of the University system

Need new rigorous and flexible approach

49

Atlante Ventures

Mature
Angel Early Stage – Late Stage - Enterprise
Seed 1° round e Expansion
Investing pre-IPO, LBO
follow on round

Atlante Ventures

•Synergy with internal partners such as Intesa Sanpaolo
Eurodesk, and external ones such as Filarete to give max
value to oportunites that are too early for Atlante
•Collaboration with other VC funds (e.g., Innogest, Fondo
Next)
51

Italy as a Lab: a way of connecting all players

Gruppo Large
corporate
Università
Ist.Ricerca
ATLANTE
VENTURES PMI

capitals competences network

•Fund focus on innovative products/approaches

“Early stage” • Large TAM

•Excellence in management team

52

Forte legame con il Gruppo Intesa Sanpaolo...

INTESA SANPAOLO
Div. Corporate&Investment Banking
Gaetano Micciché

Direzione Merchant Banking
Marco Cerrina Feroni
100%
IMI Investimenti S.p.A.
(Bologna)
100%

Sanpaolo Imi Sanpaolo Imi
Fondi Chiusi SGR (Bologna) Investimenti per lo Sviluppo
SGR (Napoli)

Fondi Gestiti Fondi Gestiti
CENTRO MEZZOGIORNO
Team Centro Impresa Team Mezzogiorno
Antonio Finocchi Ghersi Fabio Borsoi
NORD
Team Nord Impresa
Walter Comelli
ATLANTE VENTURES
Davide Turco
Team Atlante
ATLANTE VENT.MEZZOG.
Davide Turco

53

...Team organized as independent unit with ample discretionality

Management Team
4 people Team in Milan

The team presents investment
proposal

Advisors

Investment A. Perrazzelli Advisory Board with world reknown experts
L. Hassan
Committee to support Investment Committee incented
C. Bastioli (Indipendente) with stock options in companies they
A. Sangiovanni Vincentelli (Indip.) recommend
D. Turco (Responsabile)
A. Mezzotero (Investment Director)

Implementation Executive Committee
Sanpaolo IMI Fondi Chiusi SGR
Bologna

54

Conclusions

• Collaboration is key to Innovation
• Research in new domains fuels novel enterprises
• VCs essential to fuel innovation
• VCs need exits, IPO in particular
• VCs assess value of enterprise based on risks and potentials
• To found a VC-based enterprise you need:
– Defensible technology and market (value of IP and patents)
– Favorable ecosystem
– Favorable climate (business and financial)
– Proven track record
• VCs are not funding good ideas not they act as R&D support!
• Various sources of funding exist but they have to be carefully evaluated

Collaborate to Innovate: a new venture capital model

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